Why Schlumberger’s Q2 Earnings Should Get More Love

Schlumberger Ltd. (NYSE: SLB) reported second-quarter 2018 results before markets opened on Friday. The oil field services firm posted adjusted diluted earnings per share (EPS) of $0.43 on revenues of $8.3 billion. In the same period a year ago, Schlumberger said it had adjusted EPS of $0.38 on revenues of $7.83 billion. Second-quarter results also compare to the consensus estimates for EPS of $0.43 on revenues of $8.36 billion.

Adjusted pre-net income in the quarter totaled $594 million, up from $525 million in the same period a year ago. An after-tax adjustment of $164 million for workforce reductions added $0.12 to GAAP EPS.

At the end of the second quarter, Schlumberger’s backlog totaled $1.65 billion in its OneSubsea segment and $482 million in the drilling systems segment. This represents a decrease of about $260 million in backlog compared to the end of the previous quarter.

CEO Paal Kibsgaard remains optimistic about the company’s prospects for this year:

The market fundamentals continue to evolve favorably for our international business as the global balance of crude oil supply and demand tightens further. Global GDP growth remains strong, with any impact of headwinds from the US-China trade dispute likely to become clearer in the next few quarters. Despite OPEC’s recent decision to increase production, the global supply base continues to weaken from geopolitical pressure to remove Iranian production from the market, no apparent resolution to falling production in Venezuela, and Libyan exports continuing to be volatile. In North America, lack of additional pipeline capacity in the Permian Basin is becoming an increasing constraint to production growth. At the same time, spare production capacity, which is essentially limited to only a few OPEC countries, is now nearing its lowest level for more than a decade while decline in the world’s mature production base continues to accelerate. These developments underline the growing need for E&P spending to increase significantly, particularly in the international markets, as it is becoming more and more apparent that the new projects expected to come online during the next few years will not be sufficient to meet the increasing demand.

Kibsgaard also noted that he expects all Schlumberger’s spare equipment capacity to be “fully deployed during the fourth quarter, after which we expect a further strengthening of the international pricing recovery.” In other words, the best is yet to come.

Schlumberger said it expects to spend approximately $2 billion on capital investment, similar to its level in each of the past two years. The company did not offer further guidance in its press release, but consensus estimates call for third-quarter EPS of $0.51 and revenues of $8.83 billion. For the full year, EPS is forecast at $1.91 on revenues of $34.18 billion.

Shares traded up about 0.4% in Friday’s premarket at $67.30. The stock’s 52-week trading range is $61.02 to $80.35. The 12-month consensus price target was $78.71 before results were announced.

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